EU Commission Proposes One Year Delay to MiFID II, But …

The Commission has now issued proposals granting Member State competent authorities and market participants one additional year to comply with the Markets in Financial Instruments Directive (MiFID II), and the Markets in Financial Instruments Regulation (MiFIR). The new date of application is 3 January 2018. However, the delay will not have an impact on the timeline for adoption of the MiFID II and MiFIR Level II implementing measures. The Commission will proceed with their adoption irrespective of the new date of entry into application.

Jonathan Hill, Commissioner for Financial Services, Financial Stability and Capital Markets Union stated: “Given the complexity of the technical challenges highlighted by ESMA, it makes sense to extend the deadline for MiFID II. We will therefore give people another year to prepare properly and make the necessary changes to their systems. Meanwhile, we are pressing ahead with the Level II legislation to implement MiFID II and expect to announce those measures shortly.”

Conversely, two days before the Commission’s proposal, the UK’s Financial Conduct Authority (FCA) effectively brought forward to April 2016 the implementation of Article 37 of MiFIR, Non-discriminatory access to and obligation to licence benchmarks. In Policy Statement PS16/4 the FCA sets out the final Handbook text and its responses to its earlier consultation on fair, reasonable and non-discriminatory (FRAND) access to regulated benchmarks (Consultation Paper 15/18: Fair, reasonable and non-discriminatory access to regulated benchmarks).

In particular, the regulator is concerned about the unconstrained ability of benchmark administrators to set the cost of benchmarks to benchmark users. Given the way that the benchmarks are used, market participants who reference such an industry benchmark may not be able easily to switch to an alternative. This means that the administrator of an industry standard benchmark may have market power, such that it can vary the terms, including the price at which it offers that benchmark, with limited fear of customers switching quickly to an alternative, or of other suppliers entering to provide an alternative.

Such a lack of competition troubles the regulator and FRAND access to benchmarks has been on the FCA’s agenda since the Wheatley Review of LIBOR in 2012. At a time when the benchmark industry is substantially changing, the FCA sees merit in FRAND access requirements covering the full range of benchmark users. However, they have decided to await finalisation of the EU Benchmarks Regulation before applying a FRAND provision that applies to all users, and initially to align the scope of users covered by their proposals with MiFIR Article 37. This will allow the FCA to ensure appropriate consistency between the UK rules now and the longer-term regulatory requirements applying to each set of users.

The Rules

In assessing whether the terms of access to a specified benchmark are fair, reasonable and non-discriminatory, the factors the FCA may consider include:

the degree of competition and potential competition in the market for the supply of the specified benchmark;

whether the aggregate of the fees charged to users of the specified benchmark bears a reasonable relationship to the costs and risks of producing the specified benchmark, including a reasonable return on capital;

(where “A”, the benchmark administrator or a member of its group, is active on a downstream market) whether the terms of access granted for the specified benchmark would prevent a competitor as efficient as A’s downstream business from competing effectively on that downstream market on a lasting basis; and

whether a benchmark administrator applies dissimilar conditions to equivalent transactions with relevant users or different categories of relevant users, thereby placing them at a competitive disadvantage.

At this stage, the UK FRAND provisions would cover benchmarks users who are central counter-parties, multilateral trading facilities (MTFs) and regulated markets. “We are effectively bringing forward to 2016 the implementation of MiFIR Article 37 that is expected to apply from 2019.” The FCA state in the Policy Statement. The Handbook provisions come into force on 1st April 2016.

The Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 600/2014 on markets in financial instruments, Regulation (EU) No 596/2014 on market abuse and Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on central securities depositories as regards certain dates (COM(2016) 57 final) is here.

The Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/65/EU on markets in financial instruments as regards certain dates (COM(2016) 56 final) is here.

The FCA Policy Statement PS16/4 on fair, reasonable and non-discriminatory access to benchmarks is here.

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